Ontario to fall from 11th to 28th place in North American progress on electric competition

Washington, D.C.

Ontario Premier Ernie Eves’ drastic Nine-Point Plan in response to the province’s current competitive electricity regime will result in both long and short-term harm to the province’s economy, according to a report issued by the Canadian Centre for the Advancement of Energy Markets (CAEM Canada).

The report entitled, “Cried Because I Had No Shoes: The Impact of Price Caps on the Ontario Electric Market,” concluded that, if enacted, the Nine-Point Plan would adopt policies perilously close to the policies that undermined the California electricity markets.

CAEM tracks the progress toward retail energy competition in a report issued twice a year called the Retail Energy Deregulation Index (RED Index). Ontario had a score of 29 out of 100 at the end of 2001 and a score of 45 in the mid-year update issued in October 2002, making it the jurisdiction with the most impressive increase during 2002, in the study that covers 72 jurisdictions around the world. A preliminary analysis (final analysis awaits the issuance of the final legislation) of the impact of the proposed changes concluded that Ontario’s RED Index Score will drop from 45 to 10, ironically putting it in a tie with California for 29th place in North America.

This latest setback adds to the historic uncertainty in the Ontario electric market. Beginning with several delays in bringing a deregulated market to the province until May 1, 2002, canceling Hydro One’s privatization, to the current situation of price caps and “heavy-handed” regulation, potential and existing investors are likely to shy away from any commitment to investment on the generation, transmission or retail sides of the business.

The refund mechanism is a throwback to the inefficient and costly days of Ontario Hydro for which the debt retirement charges (“DRC”) still rings loud and clear. The situation is eerily similar to California’s response to its crisis in which the state government decided to put taxpayers at risk for fluctuations in the price of energy, not only affecting supply and demand in the electricity market, but also further burdening the taxpayer with additional debt responsibility.

Ontario’s electricity industry may be headed toward blackouts and brownouts similar to those experienced in California. The balance between supply and demand is uneven, stemming from the going forward lack of supply and the greater than usual historical demand from a hot summer. Since price caps exacerbate the impact of future demand, as consumers will have no incentive to curb usage, the government’s policies will eventually run up against the real cost of producing electricity, which, like California, will put the province in a financial bind and result in an overall shortage of power.

The report also compares the proposed price cap level to prices paid in the United States. The price cap is 4.3 cents per kWh for the cost of energy, which was effective as of Dec. 1, 2002 and to last until 2006. Ontario price caps are significantly lower than the U.S. average and the averages of most states.

The full report can be downloaded at www.caem.org.

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